If you are reading this, you have a desire to out from a 40-year season Mortgage man what is going on with interest and the economy. We need to explore what the mortgage rates and the stock market are going to do when the Federal Reserve Bank lowers its Fed Funds rate. The Federal Reserve or the “FED” does not control mortgage rates, they control the rates that independent banks can borrow from the Fed and this in turn is the underlying cost of money. When the Fed lowers interest rates, they lower the interest rates that banks borrow from the Fed overnight or commonly called the overnight lending rate or the Federal Funds rate. This is not directly connected to mortgage rates it does lower the cost of money to the banks so the lower the cost of money to the banks the lower the costs can be pushed out to consumers in the form of Mortgage rates and other loans banks make.
That said, all indications from the Fed are that they are going to lower the Fed funds rate from a target range of 5.25-5.50% to a possible target range of 5.00-5.25%. This means that the rates banks borrow from the Fed will go down. The hope is that this will translate to lower mortgage rates. The Fed is expected to lower interest rates by .25%-.50%, and if this happens the mortgage market has already factored that into the current rates, so when they announce they are lowering interest rates and they lower them by .25%-.50% we will not see a major move downward in long=term Mortgage rates as the markets have already anticipated this move. If the Fed lowers the rate by .25%, we may see mortgage rates go up a bit and if it is .50% we may see a slight lowering of mortgage rates but no major moves downward. The most important part of the announcement won’t be the announcement of actually lowering the interest rates, it will be what they intend to do in the future and that will move the markets more than the actual move downward in September.
If the Federal Reserve sees strength in the economy, from the numbers given to them by the Federal Government’s Bureau of Labor and Statistics (BLS) they will probably only lower the rate by .25% if the BLS number indicates a weakening economy the initial move downward will more likely be as high as .50%. If the numbers look worse than they anticipated, they may lower the rates by a larger number and that would move mortgage rates lower significantly. I and others who have been watching the Fed for decades know that they are far quicker to raise interest rates than to lower them. This is why we anticipate a max movement of .50% which has been, for the most part, factored into the current mortgage rates.
Current conventional mortgage rates have lowered into the 6’s with the anticipation of the Fed moving to lower interest rates. FHA and VA home loans are in the low 6’s to high 5’s. I am not anticipating the Fed to lower their rate lower than .50% and the markets have factored that in as well so anything different from the Fed or an announcement that the trend will be to lower rates throughout the year will have an immediate lowering of mortgage rates anything less will immediately raise mortgage rates.
The title says it all if you know what you are looking at. A little history first then we will dive into the relationships between BRICS, the Dollar and Interest Rates and it will wake you up if you haven’t been watching the world. BRICS is the formation of a new currency based on precious metals formed to take on the dollar as the world’s new reserve currency, we will get more into that in a minute. The Dollar is our currency in the United States and is the current world reserve currency. Then how do interest rates play into this equation you ask? Interest rates may not react now to both of these currencies now but they will very soon.
BRICS stands for Brazil, Russia, China, and South America, they were the original nations that signed on to use this new currency. Since the formation of BRICS, Several other countries have signed on to use this currency, countries such as Saudi Arabia, Syria, Afghanistan, and several others countries. What this means is that these countries will use the BRICS currency as their reserve currency, not the US Dollar. This has not materialized yet but it is in the works. If this new currency catches on and becomes the world’s reserve currency and not the dollar that could have to reach economic consequences for the Dollar. If you are paying attention to what is happening in Ukraine right now you have to understand that this conflict is not about Ukraine’s sovereignty from Russia it is about money. Money has driven almost all wars in history and this one is no different.
The Dollar has been the world’s reserve currency since World War 2 and before that, it was the Pound Sterling (British Currency). The Dollar was originally backed by Gold and Silver. When the US was limited to gold and silver it could not expand as fast as those that held the gold and silver wanted it to so it moved from a currency that could be backed by precious metals to the Federal Reserve Note we have today. That transition happened in 1971 under President Nixon. The US moved to what some call a “Petrol Dollar” which is a dollar backed by oil. Again, we have seen wars fought over oil now, why? Money. Today’s Dollar is really only backed by debt and that is why the world sees the dollar as a dead currency where the debt has exceeded what a normal mind can grasp. $33 trillion dollars is a number that is not quantifiable to a regular person, numbers like that are for mathematicians. The dollar has been the great magical vehicle for decades with people believing it has actual worth and that belief has allowed the US to become the largest superpower in the world.
Interest Rates, how does it play into the currency game? This one will take a history lesson as well. Interest Rates, by definition, are the cost of money. Interest Rates in the US have been controlled by the Federal Reserve and the Federal Reserve also controls the Money Supply. We can now see the relationship as the Federal Reserve controls both the supply of Dollars and the cost of the Dollar. The Federal Reserve system has been under fire lately with the way they have managed this relationship as we have seen interest rates soar over the last few years. With the dollar as the world’s reserve currency for so long the Federal Reserve Bank has been lucky that countries like China and other countries that hold a large stake in the US debt have not called it due. If the world moves away from the Dollar as a reserve currency you will see the devaluation of the dollar worldwide and those still using the dollar will see it be devalued on the world stage. A devalued dollar will create inflation and the cost of the money will have to go up to offset this. The cost of money is interest rates.
This is just a quick view of those things to come and can also explain what is going on in the world today. If you connect the dots you can see why BRICS has come to fruition. War in today’s world is being fought on the economic front not so much on the battlefield. If the BRICS currency takes over, the dollar will devalue and the cost of things in the US will skyrocket. If we have high inflation we will have high-interest rates. When you look at the conflict in Ukraine understand it is not about Ukraine at all, in fact, if you look at Ukraine you will find that their government has been corrupt for decades. If you research President Zelenskyy you will see he started off in life as a comedian and actor and worked for a TV station prior to being “elected” President of Ukraine in 2019. Zelenskyy’s net worth is estimated to be between $20 and 50 million US dollars, and some estimate it far greater than that. Meanwhile, the US has recently sent Ukraine over $120 Billion in aid. These are facts; you can even google it and see that the search engine has not yet closed the door on this information. It is on top of this administration’s list to keep the dollar as the world reserve currency to keep America the strongest and richest country in the world. When you are watching or listening to the news, however, you find your information, keep money in mind when watching as that is the underlying cause for almost every conflict in the world is money. I tried to keep this to facts that we know, but I think if you peel the onion back a bit more you will see things and understand things that you may not want to have knowledge of. There is a lot more to this that I can’t possibly go into for this short blog post so keep your eyes and mind open.
As most of you know Mortgage interest rates have been rising at a speed at which most people alive today in the home buying market have never seen before. Some of us old timers have seen this before and it is very true that history repeats itself and we should all learn from it. We are going to explore why rates are moving up so rapidly and then we will look at the future and where rates are heading and why. When I say history repeats itself all you must look to is the early 1970s through the early 1980s and see how monetary policy was run. I was a kid in the early 1970s and remember the gas lines and high inflation and interest rates that topped out right around 20% for a 30-year fixed-rate mortgage. During this, the government also set the interest rates for FHA and VA loans and put ceilings on gas prices.
If this sounds familiar it should be as the government has been involved since the beginning of time with free markets and it has never really worked out. In the 1970’s President, Nixon put gas price ceilings in place in hopes to make gas prices go down or at least stabilize them. This failed miserably as when you try to put a ceiling or a cap on prices that de-incentivizes producers from producing. During this time the government was also spending and expanding the government and services the government felt would help the common American. Then to pay for all the spending they were forced to raise taxes across the board and the Federal Income tax rate got as high as 60%. So, Government spending caused inflation, and the taxing of the citizens meant less money the average worker could take home on every paycheck thus they did spend less, and the economy was basically stagnant. During this time the term “Stagflation” was coined meaning a stagnant economy with high inflation. If this sounds familiar, then open your eyes and look around with the Government spending Trillions of dollars on “COVID relief”, the Ukraine war, AKA money being sent to the United Nations. Then we have all heard about the 87,000 IRS Agents they are hiring to make sure they get their money from the average American after they raise taxes on all of us. This type of economics is called tax and spending or Keynesian Economics.
This is poor Monetary Policy from an economic point of view. I can say without one doubt in my mind that if Monetary Policy continues down this road then we are in for many years of high inflation and high-interest rates. The government has totally neglected the economic curve's supply side and focused only on the demand side. The evidence is seen at the gas pump, the grocery store, at the automaker's showrooms, and the list goes on. Current monetary policy is to raise interest rates with the hopes that with high-interest rates consumers will slow their demand for goods and services, which has held true, however, when staples like food, fuel, transportation (automobiles), and housing prices have risen due to normal demand interest rates can’t slow the basic demand for these goods. Couple the fact that we have just come out of an economy that was shut down for basically 2 years the supply of the goods consumers need has been diminished as there were fewer workers to build or produce these basic goods. Since this has caused a shortage in supply and with the same amount or more consumers going after the same amount of goods and services with the same or less ability to produce more goods due to lack of labor and now high-interest rates or a high cost of money to pay for these workers to produce a normal amount of goods you get supply side inflation. If you have heard of this before you are not wrong, Ronald Ragan was the first to look at the supply side of the economic curve and after that was addressed in the mid-1980s the economy was more manageable. Also, with more workers working the government was getting more tax dollars by taxing the workers less and having more workers paying lower rates but more workers paying those lower rates made the government more money. This is a concept that has been lost by our current Monetary Policies which are only looking at the demand side of the demand and supply curve.
I think you now have the knowledge to see where this is all going unless some drastic changes are made. The economy has no feelings and reacts only to what is given to it. I will say without a doubt in my mind that if the supply side of the global economic and American economic curve is not addressed soon interest rates have to continue to rise. The Federal Reserve or our Central Bank only has interest rates to fight inflation with they do not have the ability to address the supply side of the demand and supply curve and without the Government’s policies changing to address this we will continue to see high inflation and high-interest rates. The way out of all of this is to actually do the opposite of what is going on currently. I agree with the Federal Reserve in raising interest rates as inflation is high, however, high-interest rates will not curve the demand and it will only hurt the supply side of the curve as it is costing companies more to have workers with high taxes and high-interest rates. Until the Government addresses the supply side of the curve this will continue to spiral upward out of control, and I am truly convinced that our current government leaders do not understand this basic economic concept. In fact, they have gone so far the other way spending money to “protect the environment” they have basically stopped the expansion of oil production in the United States, and with a low supply of oil you get higher gas prices. Oil is not only used for our automobiles but our roads, plastics, fertilizer, and so many goods are produced from oil that people don’t even realize. The price of fuel is directly related to our food prices, as well, and people may not realize that it cost more to deliver the food on a truck, it also costs more for the fertilizer to grow the food. It also costs more for the farmers to till the fields and harvest the food as that is all done with fuel. We are nowhere close to using electric vehicles for all of this and then you have to ask the question, are we going to need fuel to power generators to make the electricity to power all the electric vehicles? I agree we should be more environmentally friendly, but not at the expense of our way of life, and our economy invest more time to come up with real solutions not a knee-jerk to some environmentalists. The real solution to clean power is Hydrogen as 2/3 of the Earth is covered in water and when you burn Hydrogen the byproduct is water, why we have not gone down this road baffles me, but I digress.
So, I will conclude this by saying if we stay on the current course the interest rates will be around 8% by the end of the year, and by the first quarter of 2023, we will have interest rates at or above 10%. You might think this is a crazy prediction but look at the history of this type of Monetary Policy and see what happened last time. I am not a Doom and Gloomer, I consider myself a realist and everything to this point under the current Monetary policy has not worked or has made things worse. If you read some of my earlier blog posts and the dates, I wrote them you will see I have been dead on. Remember the economy has no feelings it does what it is told to do, all you have to do is look to see what it is being told to do and you will come to the same conclusion I have. Unfortunately, I have no say in how the government creates its policies and if I did I fear I would be called an “Extremist” in my views. We will see sagging housing prices, but the rub will be that no one will be able to afford them with rates as high as they are headed without some income inflation to match the current inflation rate, however, if you make more income but are taxed at a higher rate your net income will have gone down. We live in a world with cause and effect and if the elected people can’t see the cause and effect of their policies then We the People pay the price. If you are a first-time home buyer don’t be discouraged by all this as there are only 2 things you should be concerned about and that is “What is my payment going to be and what is it going to cost me to get the house?” Once you own the home and you can make the payment then it should not matter to you what your rate is if you are comfortable making the payment. When the rates come down you can always refinance to a lower mortgage payment. So now is a great time to buy your first home, but it is now before the rates go even higher because they will be worse before they get better.
Has the Federal Reserve Board gone too far with raising Interest Rates? The Federal Reserve raises interest rates to combat inflation. Yes, we have high inflation, but has it been caused by high demand for goods and services or is it normal demand with a diminishing supply of goods? This question is not a question the Federal Reserve (the Fed) has not addressed properly as when inflation started to be seen the Fed initially called it “Transitory” meaning short term, turns out they were wrong. So now after the Fed realizes their mistake, they are raising interest rates at a far faster rate than they would have normally.
When the Fed raises interest rates, they only control one rate which is the Federal Funds Rate or the rate at which banks can borrow from the Fed. The Banks, in turn, raise their prime lending rate to the public which affects business loans, Home Equity Lines of Credit, but not the interest rates for your typical home loans. The reason home loan rates increase or decrease when the Fed raises rates is the fact the home loan rates are driven by the FNMA, FHLMC, and GNMA and the bonds that are spun off of those securities. Wall Street will actually set the rates based on a perception of what will happen as a result of the Fed raising its interest rate. There is another factor at play here that needs to be addressed and that is the fact that the Fed has been buying mortgage securities since the pandemic started and now they are selling their holdings off reducing the “balance sheet” as some of you may have heard.
The Fed is raising interest rates to slow down the economy in the hopes that the demand side of the economy will slow due to the higher interest rates thus slowing the demand to borrow money and expand. This philosophy is fine and works if both sides of the demand and supply curve are addressed. The problem I see here is that the Fed is overreacting to situations they can’t control. The Fed has no way of controlling the supply of goods and services they only can control the demand side. The problem with this philosophy in this economy is that I see normal demand with a shortening supply of goods and services. So, by trying to slow demand they are missing the fundamental problem and that is the supply side of the equation. We all have heard about China and its lockdowns over the last several months. This is causing a supply shortage of consumer goods, auto parts, microchips, clothes, and retail goods. The Fed can’t control the loss of these goods in our supply chain they are simply making it harder for American businesses to catch up to the loss of goods coming from overseas.
As the Fed tries to fight inflation by raising the rates and ignoring the supply side we will see a recession in the near future as the economy will have to pay so much more for the money that is needed to expand American Business. Oil prices are also a major factor in the inflation equation as we can all see at the pump. The Fed can’t control the demand for oil by raising interest rates, so as prices for oil continue to rise so will the price of goods and services until the price of oil is addressed by increasing supply or at least showing the American people that the government is working on freeing up resources to increase supply inflation will continue. As inflation soars and the Government doesn’t address the supply side of anything we will continue to see inflation and eventually with rates rising so high we will see an economy stagnate to the point where there is no possibility of expanding the economy with high rates to borrow money. This is called stagflation and I would argue we have been in this state for some months now with it worsening every day.
On the Real Estate and Mortgage side of rising interest rates, the signs will be obvious. As interest rates rise the affordability of homes will diminish even further. As demand for Real Estate dries up due to high-interest rates you will see the demand for home goods diminish as well. As the demand for money drops off with the high rates mortgage companies will be laying off workers and so will home improvement stores, home builders, and appliance stores. This ripple effect will cause other industries to have to lay off workers and the economy will slow so fast that you will have high prices for gas, food, and all services that revolve around them. Eventually, the prices of homes will go down due to high-interest rates and people out of work not being able to afford a home. I don’t want to scare people, but the government has been out of control of the economy for over a year now and it is showing and will continue to decline if logical decisions are not made. My fear is that what should be done and what is being done is all somehow politically motivated. Janet Yellen, the secretary of the Treasury of the United States, admitted that she made a mistake with inflation by not raising rates soon enough. Now fast forward to today the Chairman of the Fed Jerome Powell is glossing over the supply side of the equation for some reason and that should scare you as that is the core problem with inflation, not the demand side. So, I see the Fed raising rates to where we see a deep recession with mass layoffs on the horizon if they don’t stop with the interest rates and move to the supply side. Again, politics get in the way with this as the current administration is responsible for the price of oil as they have shut off possibilities of America producing more thus having to look to foreign sources of oil. Although this may look grim we are all Americans and we will persevere and prosper. To counteract rising interest rates look for new innovative home loan programs coming soon to help those get into homes in a changing world.